We are increasingly turning into a litigious society. Stories of scurrilous lawsuits and those arising out of shakedowns, data leaks, professional negligence and workplace discrimination cases abound. And the Covid-19 pandemic has opened a whole new can of worms when it comes to liability lawsuits.
Worse yet, you don’t have to be accused of a large-scale fraud or a liability offence to be sued. These days one could face liability even if they did nothing wrong. Asset protection planning, therefore, is an important form of wealth planning. Good estate and business planning can insulate your assets from future, potential court procedures. But you need to plan and act ahead of time.
By the time you’re slapped with a lawsuit, and you’re desperately trawling the internet for guidance, it’s likely too late to protect yourself.
While nothing can make your wealth bulletproof, the following steps may prove effective in creating a protective shield around your assets - or at least put hurdles between your wealth and suitors:
Keep a Retirement Lifeline
Putting money into retirement accounts is one way to guard your wealth. Creditors might come after you if you lose a lawsuit and have unpaid debts. If the amount of money you owe forces you to file for bankruptcy, your retirement account will most likely be protected.
"RRSPs, RRIFs, and DPSPs offer some protection from creditors in bankruptcy situations,” says Cynthia Kett, principal at Stewart & Kett Financial Advisors Inc. in Toronto. “However, if the defendant doesn’t declare bankruptcy, these assets won’t be protected in the event of legal action,” she adds.
Registered pension plans and individual pension plans (IPPs) also offer creditor protection, she adds.
You could also put some of your retirement savings into a spousal RRSP. This could make your funds litigation-proof, so long as your spouse is not exposed to lawsuits or creditors.
Use Asset Protection Trusts
Entrepreneurs and professionals with significant assets could consider the option of setting up a family trust. In a trust, the use of the property is separated from legal ownership. Effectively, you are allowed to transfer beneficiary ownership of your property, to your family members without giving them control over those assets.
Asset protection trusts can keep the property out of reach of creditors in case any of the beneficiaries - your family members - are faced with a lawsuit.
“Trusts may offer protection from creditor and legal claims if they are properly structured,” says Kett. “A trust is an entity and separate taxpayer established by a settlor, who transfers the initial asset into the trust.”
She cautions, though, trusts are advanced planning tools that require professional advice to properly implement.
You could also look at holding your assets in an offshore trust to make it more difficult, not to mention costly, for suitors to access your assets.
“Certainly, offshore trusts make access to the assets more difficult because plaintiffs must pursue their claims in foreign jurisdictions,” says Kett, stressing that “the cost, inconvenience, and complexity of doing so discourages small claims.”
Transfer Ownership of Real Estate
One of the easiest things for creditors to target in a lawsuit is your real estate assets. It is critical to plan for the possibility of such claims.
“The most common techniques are to hold real estate in a spouse’s or adult family member’s name, if they aren’t subject to the same liability risks, or to register the real estate in the name of a corporation or trust, possibly as bare trustee,” Kett suggests.
Doing this creates a protective fence around your family home and makes it off-limits for creditors. Make sure to pick a family member who's not a guarantor for any of your personal or business debt.
Use an Insurance Umbrella
When you have significant wealth to protect, you may need insurance coverage that is above and beyond your primary home, auto or similar policies. An umbrella insurance policy could be one of your main lines of defence in a range of lawsuit possibilities.
“Investments in life insurance policies and/or segregated funds are protected from creditors, so they may be a place to invest excess investment capital,” Kett contends.
Insurance policies for Professional Errors & Omissions; Directors’ and Officers’ Liability; or Umbrella Liability insurance can provide liability coverage for defence costs and claims, subject to a deductible amount.
An umbrella insurance policy protects against unexpected events, such as slip and fall injury claims arising from unsalted driveways during the snow season.
If you're a business owner, you may want to place yourself under employment practices liability coverage that could protect your businesses from the potentially high costs of employment lawsuits.
High-paying, litigation-prone professions could also benefit from additional insurance. “Professional associations such as those for doctors, lawyers, and accountants, offer profession-specific liability policies to their members,” says Kett.
In fact, the College of Physician and Surgeons of Ontario (CPSO) mandates medical liability protection as a condition of licensing physicians.
Incorporate and Isolate
Operating businesses and rental real estate may be subject to high potential legal liability claims. How your business is structured has much to do with how well your assets are protected.
Depending on the size of your business, you may want to look at incorporating your business. “It may be advisable to set up an operating corporation (Opco) to isolate the risks to that entity,” says Kett, but warns that if the owners of the corporation offer personal guarantees, the risk would transfer to them, personally.
Further, excess retained earnings can be transferred “out of the Opco to a holding company (Holdco), to place passive investment assets beyond the reach of the Opco’s claimants,” she says.
Incorporation limits the liability of a corporation's shareholders as they are not responsible for a corporation’s debts, according to the Industry Canada website.
In a world where people can be sued for the flimsiest of reasons, those with significant assets can be an attractive target for big-payout litigation. These pre-emptive measures can help prevent claims on your business and personal assets arising out of a lawsuit.
